This means ratepayers will fork out on average an extra $40 per year if councillors approve to adopt the city budget with the increased rates on June 24 at a special meeting.

The council applied to the Essential Services Commission in March for a three-year rates variation above the cap of 2.5 per cent set by Victoria's Local Government Minister.

But the ESC has approved the city's rates to increase by 4.5 per cent over the next two years.

The ESC knocked back the third year of council's application.

The increase is expected to raise an extra $3.4 million for council spending on asset "renewal", including bridges, footpaths, cycleways and parks.

ESC's head of price monitoring and regulation Marcus Crudden said while Warrnambool originally applied for three years, the commission had limited it to two.

"The commission recognised that Warrnambool had identified significant challenges in the short term, but said it needs to do more in the medium term to stabilise its financial position," Mr Crudden said.

"We expect council to continue its program of service reviews and community engagement as it strives to identify a pathway to financial stability," he said.

Chief executive officer Peter Schneider said the ESC had assessed the council's submission over several weeks before reaching its determination.

"The ESC was satisfied that Council was using other available means to contain expenses and to generate revenue," he said.

"While the ESC was assessing the application council prepared two draft budgets - one with a rate cap variation, the other without a variation.

"Council now has the option to adopt a budget with the rate cap variation when it meets on June 24."

In March councillors voted 5-2 at a packed special meeting to seek permission from the ESC for the rise.

Residents in the public gallery were angered by the decision.

It came after a community survey showed less than six per cent of respondents supported a rate rise.

Crs Sue Cassidy, Robert Anderson, Mike Neoh, Kylie Gaston and David Owen supported the motion to apply for a total 4.5 per cent increase over the next three years.

Mayor Tony Herbert and Cr Peter Hulin voted against.

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A December council report said in order to maintain the current breadth and level of services, council needed to develop a mix of strategies to respond to increasing cost pressures.

"These measures include the reduction of costs, the development of innovation to deliver existing services, the introduction of new technologies to streamline service provision, seeking new income streams and seeking to alter the rate cap to provide additional income," it said.

Statistics show that the average homeowner in Warrnambool was now paying more than double the amount of rates than they were 14 years ago.

In 2003-4, the average residential rate bill was $788, but in 2017-18 that jumped 225 per cent to $1772.

The council's reliance on revenue from rates has also risen by more than 15 per cent over the past 14 years with rate revenue making up 30 per cent of the council's budget in 2004, but now made up about 45.6 per cent.

Warrnambool's rate bill was lower than some similar-sized councils such as Wodonga, Mildura and Shepparton.

The Know Your Council website shows that while Warrnambool's rates are about $3 to $5 below the average of similar-sized councils, it was $140 more than the average of all councils across the state.

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